Freedom and Entrepreneurship?

The relationship between institutions and economic development has been studied in numerous papers, and the findings are rather well aligned: institutions supporting the freedom of individuals to make private choices have a positive effect on economic growth and entrepreneurship. Institutions that are core to so-called liberal democracies, such as protection of property rights, the rule of law, and procedural/formal equality, are often found to be directly and positively correlated with the creation of economic wealth.

This already established relationship is further studied in a new study from the Mercatus Center at George Mason University, which takes a broader approach and studies the effect of freedom in general on entrepreneurship (measured as startup growth) and, hence, economic growth and prosperity. The study, Freedom and Entrepreneurship: New Evidence from the 50 States authored by Joshua C. Hall, John Pulito, and Benjamin VanMetre, finds that there is indeed a positive, empirical and significant relationship between freedom and entrepreneurship. But disaggregating the composite measure of “freedom” into “personal freedom” and the more commonly studied “economic freedom,” they find that the latter is the driver of this relationship. Hence, personal freedom is not a significant factor in entrepreneurship.

This finding is very interesting and raises quite a few questions. For instance, what does this mean in terms of policy and the attempts to help the developing world “catch up” with the developed ditto? And what does this tell us about the People’s Republic of China, which combines (limited and regional) economic freedom with personal unfreedom? (It would also be interesting to relate this finding to e.g. the thesis in Ronald Coase’s latest book, How China Became Capitalist.)

Interesting research questions such as these are, of course, in addition to the moral or ethical dimension of the policy suggestions that can be derived from these findings. What are the possible implications of learning that entrepreneurship and economic growth and prosperity result from economic but not personal freedoms?

From a McQuinn Center point of view, however, other questions emerge as potentially more interesting. If a quantitative measure of startups is positively related to economic but not personal freedom, where does entrepreneurship as judgment come in? Entrepreneurial judgment is not necessarily solely economic, but has a distinct personal or social flavor to it.

The sound entrepreneurial imagining of future opportunities under Knightian uncertainty may be derived partly from the experience of economic action (and the understanding of economic causal relationships), but the lack of personal freedom should also have an effect the entrepreneurial abilities of would-be judgmental entrepreneurs. It seems likely that personal unfreedom should affect entrepreneurially minded people’s scope of thinking and their judgmental ability. A related question: what is the role of personal freedom to such types of free-thinking that causes innovation? And do innovation and entrepreneurial judgment therefore call for re-aggregation of the freedom measure?

The implications of this study’s contribution, especially the research questions the findings give rise to, are potentially enormous. The study’s “mere” extension of the existing literature opens up for a lot of very interesting research questions.